German Business Sentiment Slips Less than Forecast

AP

Tuesday, 28 Aug 2007 | 7:29 AM ETThe Associated Press

SHARES

German business confidence slipped again in August for the third month in a row amid volatility on global financial markets, a closely watched survey showed Tuesday, but the decline was smaller than expected.

While worries over the U.S. subprime mortgage crisis may have dented the optimism, the Ifo institute and analysts said signs still point to strong economic growth in Europe's biggest economy.

"The outlook for the coming six months is still marked by optimism, albeit somewhat weaker," Ifo president Hans-Werner Sinn said. "Here the turbulences in financial markets may have played a role."

World stock markets have been very volatile this month after a slowdown in liquidity and credit prompted by the U.S. subprime mortgage crisis. That caused central banks worldwide to inject billions of euros (dollars) into money markets.

The Munich-based Ifo said its business confidence index slipped to 105.8 points in August from 106.4 in July, the third successive monthly decline in business sentiment. However, economists surveyed by Dow Jones Newswires had predicted a sharper decline to 105.2.

Companies' view of their current situation improved slightly, with that sub-index creeping up to 111.5 points from 111.3. The sub-index measuring companies' outlook dipped to 100.4 points from 101.7.

Still, "both survey components are clearly above the long-term average and point to a further robust economic upswing," Sinn said in a statement.

He said that, in the manufacturing sector, business confidence was slightly lower in August; and that, "with regard to exports, the survey participants are less optimistic despite the weaker euro."

Exports Main Motor

Exports have been the main motor of Germany's economic recovery over the past two years, and a higher euro can make products sent outside the 13-nation euro-zone more expensive. The euro edged higher Tuesday after the Ifo report, trading at $1.3670, up from $1.3653 in New York late Monday.

Gregor Eder, an analyst at Dresdner Bank in Frankfurt, said the drop in the Ifo index should not be over interpreted and forecast full-year economic growth of 2.5%.

"We believe that the current turbulence will not have major effects on economic development in Germany," he wrote in a research note, adding that "the investment boom and strengthening private consumption will drive growth in the second half of the year."

Timo Klein, an economist at Global Insight, said the Ifo survey showed the market problems had little impact on German businesses.

"The uncertainty pervading credit markets in the wake of the U.S. subprime crisis in recent weeks - and the risk aversion thus created - has apparently not led to any slowdown in domestic demand or to problems for firms to receive loans for investment," Klein said.

Although the main index slipped for the third month in a row, "the dip was quite limited and only due to deterioration of expectations for the next six months," he said. He noted that the index is still "fairly close" to 16-year highs.

The monthly Ifo index, based on a survey of some 7,000 managers across various sectors, follows a larger-than-expected drop last week in the more volatile ZEW index of investor confidence, which was dragged down by worries over the U.S. subprime mortgage crisis.

Economy Minister Michael Glos noted estimates that the subprime mortgage crisis could lead to "a loss in growth of 0.2 percentage points."

But Glos, speaking in Munich, added that "Germany is in an upswing, and this upswing is solidly underlaid."